BUSINESS - Negotiation

Negotiation

Introduction

Having spent a significant part of my professional life negotiating complex contracts with a wide variety of organisations around the world, I feel I have managed to learn a great deal about the process. In this section I hope to provide a few pointers for those engaged in negotiation to help them to arrive at a satisfactory outcome.

The general perspective taken here is the licensor securing a completed contract with the licensee. Obviously, the point of view of the licensee will be different. However, some of the pointers here apply equally to both sides, but sometimes for different reasons.

Sales Process

The whole sales process can be sub-divided into a number of distinct phases. Even a relatively small sale can follow the same path. For larger sales it is important to recognise these phases as the salesman's objective is to keep the process moving forward and not to let it lose momentum or go backwards.

The phases can be identified as:

The key point in this process is to recognise when the Selling phase ends and the Negotiation phase commences. At this point the customer has not agreed all terms for purchasing the product or service on offer, but he has made a commitment to purchase, ie he has satisfied himself that you have what he wants and the terms are at least broadly acceptable to him.

He will not have considered many of the complex detailed legal issues and may yet prove to have very fixed ideas of them. He may not have accepted key terms such as price, delivery, payment terms etc, but he will be satisfied to a large extent that these can be resolved.

Once this point is reached it is essential not to allow the process to regress to the selling phase. Always assume the sale is made and the only hurdle to overcome is the detailed contract negotiations.

Objective

We need to understand what we are trying to achieve in this negotiation process. Obviously we want to have a completed contract, but what do we need that contract to be and what does it need to contain?

Firstly, contracts need to be realistic. There is no point in writing things in contracts that are unachievable or so extreme that either party simply will not do them. Just because something is written in a contract does not mean it will happen. If you have a strong negotiating position and you push the other party to make a ridiculous concession, it will not help you in the longer term.

Contracts should be fair. Remember that after signing the contract you have to be able to execute it and that requires a relationship between the parties. If the contract is unreasonable one party is going to feel aggrieved and this will not foster good relationships, which in turn will not enable a successful outcome, probably for either party.

As the licensor/provider it is imperative that you ensure the contractual terms will result in a successful outcome for your organisation. You need to ensure proper margins are achieved and the contract properly reflects the business of your organisation. It can be tempting at times to try to provide something which may appear attractive as a business proposition only to find that it is outside of your field of expertise and experience and that it proves to be very costly for you to operate.

Trying to keep things simple is also an important objective. Unnecessarily complex contracts often make for very poor operating as few if any can understand them. Although you do not want to have your technical delivery teams bothering themselves too much with the details of the contract they should be reasonably conversant with the salient parts, in particular, those that affect the profitability and operating of the contract.

The Parties

Negotiation is a very human process and it depends very much on the characters involved. On each side of the table there should be a lead negotiator and for you it is important to try to understand your counterpart as well as possible. You need to build a relationship, which on the whole, should be friendly. You need to ensure that when you debate issues it is not a personal thing and therefore both parties can distance themselves from the tensions of the negotiations.

Different nationalities will have different approaches for any number of reasons. For example, in the US where legal due process and litigation are so much more extensive, there will be a strong focus on the detailed wording, and you must expect a more complex contract with emphasis on the language used.

Other nations see things differently, some not concerning themselves too much with the detailed wording as long as the general understanding is correct. Sometimes also the parties' attitudes to the contract and the negotiation process will be strongly influenced by their experience of their home legal system, which in some cases may well dictate a much relaxed approach to contract wording. In some cases even the wording is given little consideration as the relationship will be dominated in practice by the general understanding between the parties.

Because negotiation is such a personal process it is important to get to know the nature and experience of the party you are negotiating with. They may be very different depending upon their experience and background. Some will be lawyers or buyers with extensive experience of negotiating, often with limited knowledge of the technical aspects of the contractual matter, but holding very firm views on the legal aspects. These can be difficult people to negotiate with as their experience and their approach will likely be quite strident. However, they will understand the details of the contract and your position much more readily, so if they make a truly unreasonable claim of you they will be aware of doing it.

Some will be very inexperienced and generally out of their depth. These too can be difficult to deal with as they are not sufficiently conversant with the terms and will tend to misjudge priorities, often negotiating hard on things that are of little or no consequence while missing the really critical points.

Emotions

Negotiation is often an emotional process. It is very easy for tempers to flare and for the parties to fall out. This is to be avoided at all costs. Because negotiation is a very personal process and many concessions are viewed as personal, it is important to keep emotions under check to avoid parties becoming forced into an impasse which then requires a much larger step to back down.

Practice retaining a very level temperament as much as possible so that whatever the other party throws at you will not change your demeanour or lead you to say something you might later regret. Sometimes this is difficult, and sometimes the other party will be much more emotional about things if they are less experienced, but it is important you do not rise to the provocation.

Bartering

Bartering is a very crude aspect of negotiation as it leaves little or no room for logical and objective debate justifying ones position. Any argument about value is entirely dependent upon the parties' view of the product in question. On one side the seller has an idea of the costs involved and hence what they need to see to make money, and to cover an element of risk which may lead to added costs. The buyer has their idea of the value to them and how much they should have to pay.

The most basic form of bartering begins with a bid-offer spread followed by a back and forth until the average of the two original prices is reached. In other words, the buyer will always open with as low a price as possible and the seller as high as possible. The lack of objectivity here means very unsatisfactory outcomes may result.

Firstly, one must have a good idea of an acceptable price point. If you suggest a higher price you need to ensure at least some room for manoeuvre. If the other party counters with a reasonable price point you can continue the barter giving a little at a time until you reach a sensible point at which the debate should end and you need to hold firm at your price.

If the other party responds to your original price with an offer which is simply ridiculous and far outside your range of acceptable prices, then you should counter with exactly the same price originally suggested. In other words, do not enter the bartering process at all.

Do not be afraid to walk away. See later.

Trading Concessions

A standard approach to negotiation is to seek concessions from the other party and to make a concession in return. The key here is to trade concessions such that you give things which are not important to you, but the other party deems to be important to them. Always make it look hard for you, even if you know the concession is not important to you. You need him to think it is important.

Trading concessions is often a standard and fair way of negotiating, and like bartering allows you to converge on a middle ground. However, it is always important to link concessions logically so that the other party cannot readily return to a concession made and try to reverse it because there is no sense to the link to the counter concession. Don't assume that when a point is negotiated it cannot be revisited.

Explanation

Probably the most important aspect of negotiation is to spend time explaining the terms and their meaning. Often the other party will not readily understand why you are seeking certain terms, but if you can put a sensible and well structured explanation of what is meant by the term, it becomes harder for them to resist. If there is a good reason for a term, they will have to accept it.

Most important of all is that you must know and understand your contracts and what they mean. This is important for any number of reasons, but if you cannot persuade the other party through structured argument, then it will leave you vulnerable to trading terms without properly understanding what they mean and how important they may be to you.

Tactics

There are many tactics that one can use in negotiation ranging from subtle ways of managing the client to crude ways of destabilising them, for example by entertaining them to a very heavy night out before an early morning start on the negotiations.

Probably the most important starting point should be a draft precedent contract provided by the seller/licensor. This should be a well-crafted precedent covering all points and presented in a suitable manner to aid negotiation. You will have to decide your starting point for this precedent, but I would argue a sensible middle ground is important. As a yardstick I would say that if the other party was to sign the agreement as it is presented they would not be seriously disadvantaged.

As the seller/licensor do not be persuaded to accept their contract even if they appear to have a more complete solution. You always want to be negotiating away from your position and not from theirs, which will always be harder.

Using the draft contract as the mechanism to frame the negotiation is always a very good thing to do. The terms are clear, with things in writing the negotiations can make true progress and both sides can take time off-line to consider and review things. Always make use of track changes features in word processors so you can readily see how each iteration of the contract evolves. Work out a system if at all possible such that areas still in negotiation are highlighted, while those which have been agreed are clear to see.

Actually modifying the wording as you discuss the terms is often useful as it eliminates any possible misunderstanding about what has actually been agreed. This does impose a responsibility to ensure the document remains consistent, something that may have to be checked carefully after the negotiation is completed and a final version of the agreement is being prepared.

Priorities

In any contractual situation there will be aspects which are important to you and those which are not, or at least less so. It is important to know these and to bear in mind the significance of any terms as and when you are discussing them.

This is often about risk, which is a hard thing to accurately assess. If risk is high then you must be confident that the chances of it occurring are small, and if the risk is likely to have only slight consequences, you may be more relaxed about it being present.

As you discuss terms be careful not to reveal your own assessment of risk and consequences, as that will enable the other party to see where your sensitivities lie. Similarly, you have to try to assess from his point of view what is important to him and why. Trading things which are of low priority to you and high priority to him will help you hold firm on issues that are important to you.

Sometimes of course it is a good idea to get bogged down in lengthy discussions about things which are not critical to you, but making them appear so will always make your concession that bit more significant in the other party's eyes.

Limits - Walk Away

Some find it hard to walk away from any contract negotiation. In other words, a deal has to be done, it is just a matter of what that deal looks like. This may well be the case in practice, but you certainly do not want the other party to know this.

However, it is important to have limits beyond which you will not go. Limits that could force a walk away to occur. This is a potential threat you can use, such as "I will not get that past my CEO", which puts the decision outside the room and identifies a point at which you have to walk away. Rather than protract the process the other party may well back down at that point, but in any event it is always good to signal that you are prepared to end the discussion without agreement if the terms do become far enough away from an acceptable position.